Growth in the second charge market has fluctuated over the past couple of years as the property market continues to grapple with multiple challenges and tumultuous conditions that linger from 2022.
Rising inflation and interest rates, plus soaring energy bills — against a backdrop of the cost-of-living crisis — have stifled the market somewhat, with high house prices and a lack of quality stock posing further challenges to landlords, homeowners and prospective buyers.
This uncertainty has been reflected over the past year in second charge mortgage statistics, as growth has been hindered.
Customers are likely to refrain from remortgaging
However, as the economic landscape begins to stabilise, figures for second charge mortgages in 2023 show signs of promise.
The most recent data from the Finance & Leasing Association shows that second charge mortgage lending in March hit £123m, which is the highest amount of monthly new business this year. Although this figure is down 12% compared to the same point in 2022, second charge loans amounted to £1.5bn for the year to March, which is a 24% jump on the previous year.
Covid anomaly
Of course, the past couple of years can be viewed as a slight anomaly, given the Covid-19 pandemic. As many were confined to their home and restricted on what they could do, home refurbishments moved to the top of the agenda for many property owners, which in turn boosted lending figures. In contrast, in the most recent data for March only 14% of second charge lending was for home improvements.
Second charge mortgages have become a more popular solution for those planning to raise capital because of the flexibility they provide
This may change as the year progresses, as people look to make energy-efficient upgrades to their properties to mitigate the effects of the cost-of-living crisis and reduce household bills. In addition, with second charge finance often used as a tool to consolidate debt, the increasing financial pressures could prompt more consumers towards this product.
Indeed, the impact of the cost-of-living crisis is already evident in the latest data. Consolidation of existing loans represented nearly three in five (58%) new second charge agreements, showing that property owners are taking steps to control their finances.
Rising interest rates are also likely to present an opportunity for second charge loans. With the interest rate currently at 4.5%, compared to 1% just 12 months ago, remortgaging is likely to be seen as a less viable option as a means to raise capital.
Second charge loans amounted to £1.5bn for the year to March, which is a 24% jump on the previous year
Customers are likely to refrain from remortgaging, which would lose them their existing rate that almost certainly is better than the rate they’d be offered now. A second charge facility enables homeowners to raise capital without having to forfeit their current rate on their first charge before they need to.
Second charge mortgages have become a more popular solution for those planning to raise capital because of the flexibility they provide. Where mainstream lending products may prove rigid in this circumstance, second charge loans can provide clients with a realistic and suitable solution that can be tailored to their requirements, both in the scale of the project and in their financial constraints.
Understanding a client’s aims for the project, as well as their current financial position, will all help to inform the pathway they choose.
Consolidation of existing loans represented nearly three in five (58%) new second charge agreements
Second charge is a specialist lending product and therefore requires expert teams to support clients with the complexities associated with this type of funding. But it should be seen as a viable option to take under consideration to enable more property owners to make efficient changes.
As the property market and the economy stabilise further, second charge figures are likely to continue on their path of increased growth in value through the rest of the year, as more people look to press on with plans.
Gavin Seaholme is sales director at Shawbrook Bank
This article featured in the June 2023 edition of MS.
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